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Discretion needed on infrastructure assets

Discretion needed on infrastructure assets

Killian Plastow
— 1 minute read

Investors should consider narrowing their definition of infrastructure as an asset class to fully realise the defensive role it plays in a portfolio, says Maple-Brown Abbott.

In a note to investors, Maple-Brown Abbott portfolio manager Steven Kempler noted “significant variance” in median volatility within infrastructure sectors.

Mr Kempler also noted that a 2015 Maple-Brown Abbott white paper had found that many existing global-listed infrastructure indices contained businesses that “simply are not infrastructure”, such as competitive railways and integrated utilities.

“Narrowing the scope of investible assets through a deep understanding of the sectoral and the commercial arrangements can help deliver the desired infrastructure characteristics from any investment, including lowering portfolio volatility,” he said.

Mr Kempler referred to research conducted by Russell Investments in 2011 which indicated the importance of investing in companies with an infrastructure-specific focus to maximise the asset’s defensive qualities.

“Within the listed infrastructure asset class, we believe it is very important for investors to get exposure to pure-play infrastructure companies offering steady, low-volatility cash-flow streams supporting strong diversification with other asset classes,” the Russell Investments report said.

To this end, Maple-Brown Abbott has chosen to exclude businesses which lack “high pricing power or strong barriers to entry, including competitive, cyclical, or market-priced infrastructure” from their definition of the infrastructure asset class, Mr Kempler explained.

When appropriately defined, the firm said, infrastructure as an asset class “sits somewhere between debt and equity” on a risk and reward basis.

“It also provides a higher yield to investors and is expected to continue to deliver real dividend growth, providing a degree of inflation protection to a diversified portfolio,” he added.

Infrastructure can take on a “more significant role” in portfolios during periods of market weakness and continued uncertainty when used as a strategic part of a diversified portfolio, Mr Kempler said.

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Discretion needed on infrastructure assets
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